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Russian Economic Crisis Deepens as Oil Giant Lukoil Profits Plunge
Russia’s economic crisis is intensifying, significantly impacting major industries as evidenced by a substantial downturn in profits at Lukoil, the nation’s second-largest oil producer. A potent combination of soaring inflation and elevated interest rates is exerting considerable pressure on Russian businesses and consumers alike, leading to widespread financial strain.
Economic Headwinds Batter Russian Businesses
High Interest Rates and Inflation Strain Firms
The Central Bank of Russia has been compelled to maintain its benchmark interest rate at a steep 21%, a recent historical peak, in an effort to control inflation, which currently stands at 10.10%. This elevated interest rate is placing immense pressure on companies with substantial loan portfolios, making debt repayment increasingly challenging as they struggle to remain operational. Sectors such as retail and construction are acutely experiencing the brunt of this escalating economic downturn, with widespread closures of shopping centers looming as a distinct possibility.
Grocery Prices Surge, Impacting Consumers
Russian consumers are facing financial hardship as food prices rise dramatically, outpacing the official inflation rate. Over the past year, significant price increases have been recorded for essential grocery items:
- Milk and Apples: Approximately 20% increase
- Cucumbers: 22% increase
- Beetroot: 32% increase
- Butter: 35% increase
- Cabbages: 42% increase
- Onions: 46% increase
- Potatoes: A substantial 90% increase
Oil Industry and Commodity Exports Hit Hard
Lukoil’s Profit Decline Signals Wider Economic Woes
Despite ongoing diplomatic discussions between the US and Russia, which could potentially lead to a reduction in sanctions against the Kremlin, the economic crisis shows few signs of easing. The latest sector to be adversely affected by the worsening economic climate is the oil industry, a crucial source of revenue for the Russian government.
Significant Profit Drop for Oil Producer
Lukoil reported a dramatic 26.5% decrease in net profit for 2024, attributing the downturn to asset impairment losses and increased deferred taxes. The company’s net profit for the past year totaled 848.5 billion rubles ($10.1 billion), a considerable fall from 1.1 trillion rubles ($13.7 billion) in 2023.
“The group recorded an impairment loss of 93.3 billion rubles in fixed assets,” Lukoil stated, “with 50.4 billion rubles related to exploration and production assets and 31.1 billion rubles in processing, trade and sales assets located abroad.”
Stock Market Reaction and Export Concerns
Following the release of these earnings results, shares in Lukoil experienced a decline of nearly 1% for three consecutive trading days on the Moscow Stock Exchange. Adding to the Kremlin’s economic challenges, projections indicate a continued downward trend in key commodity exports.
Decline in Key Commodity Exports Forecasted
Wheat and Coal Exports Expected to Fall
Russian wheat exports are anticipated to decrease to 47 million tonnes in 2025, a reduction from 59 million tonnes the previous year, according to projections from ship broking firm Howe Robinson Partners. Coal exports are also predicted to decline as the industry continues to grapple with the repercussions of sanctions and diminishing profitability. Howe Robinson Partners estimates that coal exports are likely to reach only 164 million tonnes this year, representing a 6.1% year-on-year decrease.